EUR/JPY rallies above 160.00 as BoJ Shinichi remains dovish on interest rate outlook

The EUR/JPY prints a fresh weekly high near 160.50 in the European session on Thursday after dovish commentary from Bank of Japan (BoJ) Deputy Governor Uchida Shinichi. BoJ Shinichi said the central bank would be reluctant to raise interest rates aggressively despite exiting the decade-long ultra-dovish monetary policy.

Uchida Shinichi added that monetary policy conditions in the Japanese economy are in a deep negative trajectory, which is not expected to get blown up aggressively.

The Japanese Yen has been under pressure as BoJ policymakers run behind the market’s expectations of adopting a neutral stance. Slower wage growth momentum has been limiting hopes of exiting from an easy policy stance, limiting the sustainability of price pressures above 2%. Meanwhile, deepening geopolitical tensions have escalated uncertainty over restrictive policy stance.

On the Eurozone front, a vulnerable economic outlook has prompted expectations of early rate cuts by the European Central Bank (ECB). ECB policymaker Pablo Hernandez de Cos said this week, "it is already very important for European citizens to know that we are confident the next move will be a cut.” ECB Cos remains confident about inflation declining towards the 2% target.

On the contrary, the ECB Economic Bulletin released in early London indicated that Governing Council (GC) members will ensure that key rates remain sufficiently restrictive as long as price stability is ensured. Over the economic outlook, GC members anticipate a stagnant performance for the final quarter of 2023.